Last week, Gov. Jerry Brown gave his final state of the state speech. Just one sentence in, he asserted, “[s]imply put, California is prospering.” Personal income has grown to $2.4 trillion, from $154 billion in 1975, and 2.8 million new jobs have been created.

In 1975 the governor started the first of two terms that ended in 1984. In 2011, when he began his third term, California faced a $27 billion deficit, and the media disparaged the state without mercy: The New York Times called California "The Coast of Dystopia," the Wall Street Journal foresaw a “Great California Exodus," and the Economist of London pronounced the Golden State, "The Ungovernable State,” while Business Insider “simply said: ‘California is Doomed.’"

Gov. Brown was especially pleased to call out the following as efforts that have restored public confidence:

Pension reform

Workers' compensation reform

The water bond

The rainy day fund

The cap-and-trade program

Among the initiatives on the table for this year are the following:

A task force to address the forest fire threat.

Plans for the revenues associated with cap-and-trade auctions; the newly passed water bond and gas tax; the Local Control Funding Formula for K-12 school funding; and higher education funding.

Ongoing attention to California Waterfix, the water system modernization project.

Studying the criminal justice system and enacting laws more compatible with current needs.

Plans for high-speed rail construction.

Specifically with respect to the high-speed rail project, Gov. Brown called out the controversial $54 billion transportation funding plan that was passed into law by way of SB-1 last spring. Several months later,we noted that there was a robust repeal effort under way, including the California Repeal Gas Tax and Fees Increase Bill Initiative, which was to be on the November 2018 ballot. Ballotpedia reported that this repeal Initiative will not be on the ballot after all, because there were not enough signatures, but Sponsor Assemblyman Travis Allen will support a different ballot initiative to repeal the gas tax and fees increases, started by Reform California.

About this, the governor the promised to “do everything [his] power to defeat any repeal effort that may make it to the ballot…The funds that SB 1 makes available are absolutely necessary if we are going to maintain our roads and transit systems in good repair. Twenty-five other states have raised gas taxes. Even the U.S. Chamber of Commerce has called for a federal gas tax because the highway trust fund is nearly broke.”

Budget priorities

Gov. Brown’s 2018-19 budget summary, released on Jan. 10, 2018, reflects his state of the state promise to “persist against storms and turmoil, obstacles great and small.” It asserts that “[a]s was true in 2011, our Job Number 1 is fixing our state budget and keeping spending in line with revenue. In a volatile and uncertain world, fixing the budget is a perpetual struggle and one we must approach with wisdom.”

To this end, the budget seeks to avoid drastic setbacks while accepting the possibility of an “an inevitable recession lurking in our future.” It projects a 2.3 percent increase over in general fund revenues over that in the 2017 budget, $135 billion. After accounting for transfers to the Budget Stabilization Account, also known as the Rainy Day Fund, that figure is about $130 billion, down 0.3 percent from the 2017 budget.

The main components of the general fund are these:

Category

Proposed budget (millions)

% difference from 2017 budget

Percent of total

Personal income tax

$93,593

2.8 percent

69.3 percent

Sales and use tax

$26,151

1.7 percent

19.4 percent

Corporate tax

$11,224

-0.2 percent

8.3 percent

Insurance tax

$2,508

-3.5 percent

Alcoholic beverage tax

$382

0.8 percent

Cigarette tax

$63

0.1 percent

Pooled money interest

$294

78 percent

Other revenues

$908

0.2 percent

Sub Total:

$35,123

2.3 percent

Less transfers:

-5,531

175.4 percent

TOTAL:

$129,791

-0.3 percent

As this reveals, the first three categories make up almost all of the revenue, or 97 percent, as follows:

Personal income tax: 69.3 percent of total revenues

Sales and use tax: 19.4 percent of total revenues

Corporate tax: 8.3 percent of total revenues

The budget summary concedes that its forecasts do not take into account the new federal tax law, the federal Tax Cuts and Jobs Act. Even though the full effect of the Act will not be realized until after taxpayers file their documents for tax year 2018, the May Revision will contain a preliminary analysis of the projected impact.

DAVID KALL

DAVID EBERSOLE

I am a recognized tax advisor who takes a team approach to working with clients to achieve business goals. I leverage my public sector background to understand all perspectives and leave no tax planning or tax controversy stone unturned.